QTS Confirms Plans for IPO, Major Expansion

QTS (Quality Technology Services) has confirmed plans for a $300 million initial public offering (IPO) that will help fund a major expansion of the company's footprint, focused on its massive data centers in Dallas, Richmond and Atlanta.

A view of the rows of racks packing a pod inside the QTS Downtown Atlanta data center.

QTS (Quality Technology Services) has confirmed plans for a $300 million initial public offering (IPO) that will help fund an expansion of the company's footprint, focused on its massive data centers in Dallas, Richmond and Atlanta.

In an SEC filing, QTS outlined its plans to go public on the New York Stock Exchange, trading under the symbol QTS. The company plans to convert to a real estate investment trust (REIT) and operate as QTS Realty Trust Inc.

QTS has big ambitions for the future, fueled by its strategy of buying massive industrial facilities and adapting them for data center use. In its SEC filing, the company said it plans to expand seven of its data centers across the county, investing up to $277 million to add more than 312,000 square feet of customer space in key markets over the next two years. The majority of that growth is projected for Dallas ($88 million investment), Richmond ($78 million) and Atlanta Metro ($54 million) , but QTS also plans to add more space at existing sites in Jersey City, Sacramento, Santa Clara and Suwanee, Georgia.

Focused on Redevelopment

"We believe our redevelopment pipeline provides us with a multi-year growth opportunity at very attractive risk-adjusted returns without the need to construct new buildings or acquire additional properties or land for development," the company said. "We currently target a stabilized return on invested capital of at least 15% on average for our redevelopment projects."

QTS operates 10 data centers in seven states offering 714,000 square feet of raised floor data center space and 390 megawatts of available utility power. The portfolio also includes 2.2 million square feet available for redevelopment, including 1.1 million square feet that can be converted to raised floor data center space.

On the financial front, QTS reported revenue of $84.4 million in the first half of 2013, with net income of $7.1 million and funds from operation (FFO, a key benchmark for REITs) of $26.7 million. In 2012, the company had revenues of $157.6 million and FFO of $45.2 million.

Here's a look at some of the additional opertating details highlighted in the company's IPO filing:

The greater Atlanta market, where QTS is the dominant player, represents a substantial piece of the company's business Of the $52.9 million in revenue from data center leasing in 2013, $38 million is generated from the company's two Atlanta facilities, Atlanta Metro ($25 million) and Suwannee ($13.4 million). The campuses in Santa Clara ($5.5 million) and Richmond ($4.7 million) are next, with the other four sites totaling $4.3 million in revenue.

QTS has some lease renewals ahead. Leases representing approximately 27 percent of the company's raised floor and 44 percent of its annualized rent will expire in either 2013 or 2014. That includes a number of month-to-month leases.

As of June 30, QTS had 870 customers, with none accounting for more than 8 percent of monthly recurring revenue (MRR). About 39 percent of recurring revenue is from customers using managed hosting or cloud offerings. Fortune 1000 and equivalently sized private and/or foreign companies accounted for approximately 57 percent of MRR.

QTS Realty Trust will be created through a "formation transaction" that will consolidate holdings between current investors, including the private equity firm General Atlantic and Chairman and CEO Chad Williams. The business unit that provides managed services to customers, Quality Technology Services Holding LLC, will operate as a subsidiary. The company will go public using a two tier stock ownership that preserves voting control over the company in a class B preferred stock.